Fed's Bernanke sounds optimistic note about bank lending

WASHINGTON (MarketWatch) -- There are some reasons for optimism about the outlook for bank lending even though lending is still contracting and credit remains tight, Federal Reserve Board chief Ben Bernanke said Thursday.

In a speech to a conference on bank supervision sponsored by the Federal Reserve Bank of Chicago, Bernanke pointed out that the Fed's latest survey of senior loan officers found out something that hasn't been the case since the summer of 2007: no net tightening in lending standards for small businesses.

"As a result, bank attitudes toward lending may be shifting," he said.

U.S. stocks retreated for a third day Thursday as concerns about Europe's fiscal health drowned out Bernanke's optimism. The Dow Jones Industrial Average
DJIA, +0.72%
was recently down 87 points to 10,780.

As is typically the case, Bernanke tempered his remarks with caution.

The number of regional and community banks considered weak is still increasing and their loan losses should remain high this year, with residential mortgages and commercial real estate loans continuing to be the most significant areas of concern.

In addition, "with credit demand tepid and the economy still under stress, profitable lending opportunities have been relatively scarce for many of these banks," Bernanke said.

Many of these banks may need additional capital over the next few years, he said.

Bernanke is one of a half-dozen Federal Reserve officials speaking Thursday.

Stress-testing's aftermath

The Fed chairman devoted a large portion of his remarks looking back at stress-testing conducted on the biggest U.S. banks last spring -- a program credited with easing panicked views of the banking sector that prevailed in the wake of the collapse of Lehman Brothers in September 2008.

The Fed conducted the test of 19 biggest banks that together held two-thirds of all U.S. banking assets.

These banks have added $200 billion in common equity during the past year. Although these banks have improved their positions, "they continue to face challenges," Bernanke said.

Moreover, it isn't possible to say precisely at this point whether the banks that underwent stress-testing are performing better or worse than estimated because the Fed's data covered 2009-2010 as a whole and didn't break losses to specific quarters, according to Bernanke.

"It is encouraging that, through the end of last year, the revenues of the [stress-test] banks have collectively reached 60% of the two-year estimates under the more adverse scenario while loan losses are at only about 40% of estimates," Bernanke said.

Fed presidents weigh in

In separate remarks, Jeffrey Lacker, the president of the Richmond Federal Reserve Bank, said he though that "the worst" of the financial crisis is "definitely behind us."

There are banks and other lenders who have experienced high losses and are now facing a higher cost of capital and are reducing their outstanding loans, Lacker said.

"But the majority of banks appear to be ready and eager to lend to creditworthy customers," Lacker said.

Borrowers may need to shop around, but "I believe that credit market capacity is sufficient to support productive investment and allow a solid recovery to proceed," Lacker said.

And in testimony before Congress, Thomas Hoenig, the president of the Kansas City Fed Bank said he thought the largest financial firms were showing "a solid recovery."

Hoenig urged Congress to put in place hard leverage rules for banks - for example restricting banks to holding no more than $15 of tangible assets for every $1 of tangible equity capital.

At the end of 2007, the 10 largest bank holding companies held $34 of tangible assets for every $1 of tangible equity capital, Hoenig noted.

This debt was cheaper for these firms because creditors were confident that these firms were too big to be allowed to fail.

"This is not capitalism, but exploitation of an unearned advantage," Hoenig said.

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